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When looking at the level of real per capita income in the bottom left-hand panel of Figure 5, the overall effect is clearly positive. In fact, a decline in transport costs by 40% increases the present discounted value of the world's real GDP per capita by 70.7%. The gain in Asia is even larger: real GDP per capita increases 78% in present discounted value terms. These gains are much larger than those found in standard quantitative international trade models. For example, Costinot and Rodríguez-Clare (2014) estimate that eliminating a worldwide tariff of 40% would increase welfare by just around 3%.8 Two reasons explain the greater gains we find. First, the reduction in transport costs affects both international and domestic trade. In countries that comprise large land masses—such as Australia, India, and the Russian Federation—this additional effect is substantial. Second, the reduction in trade costs not only has static effects, it also has dynamic effects on market size and agglomeration. Giving firms easier market access increases their incentive to innovate. In addition, regions that gain density will innovate more, though there will of course be other regions that lose density and hence innovate less. Given that in equilibrium, and due to the replicability and diffusion of technology, the level of local innovation is always suboptimal, this redistribution in general leads to dynamic gains. Furthermore, the gain from a worldwide drop in transport costs is greater in Asia than in the world as a whole. One reason is that Asia starts with relatively poor transport infrastructure, therefore a 40% improvement would have a big effect. Similarly, Table 2 reports that among the largest countries in developing Asia the one that gains the most is India, the country with arguably the region's worst transport infrastructure, and the one that gains the least is the Republic of Korea, the country with arguably the best transport infrastructure.

Table 2. 
Increase in Real per Capita Income and Welfare under Different Counterfactuals
Increase in PDV of
real GDP per capitaRepublic
compared to baselineWorldAsiaPRCIndiaIndonesiaof KoreaJapan
1.  40% lower trade costs in the world 70.7% 78.0% 79.1% 81.9% 78.1% 65.1% 61.3% 
2.  40% lower trade costs in Asia 38.5% 73.8% 74.7% 77.3% 72.9% 57.2% −0.5% 
3.  Upgrade minor roads to major roads in Asia 2.8% 7.2% 10.3% 3.5% 6.0% 4.9% 0.0% 
4.  25% lower migration costs in the world 30.6% 9.0% 3.9% 6.9% 4.6% −0.7% −1.3% 
5.  25% lower migration costs in Asia −12.9% −3.7% −8.3% −6.2% −7.9% −11.0% 2.5% 
Increase in PDV of
real GDP per capitaRepublic
compared to baselineWorldAsiaPRCIndiaIndonesiaof KoreaJapan
1.  40% lower trade costs in the world 70.7% 78.0% 79.1% 81.9% 78.1% 65.1% 61.3% 
2.  40% lower trade costs in Asia 38.5% 73.8% 74.7% 77.3% 72.9% 57.2% −0.5% 
3.  Upgrade minor roads to major roads in Asia 2.8% 7.2% 10.3% 3.5% 6.0% 4.9% 0.0% 
4.  25% lower migration costs in the world 30.6% 9.0% 3.9% 6.9% 4.6% −0.7% −1.3% 
5.  25% lower migration costs in Asia −12.9% −3.7% −8.3% −6.2% −7.9% −11.0% 2.5% 

GDP = gross domestic product, PDV = present discounted value, PRC = People's Republic of China.

Note: PDV is based on the years 2000‒2600 with a discount factor of 3.5%.

Source: Authors’ calculations.

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